A $1.6 million Auckland home has failed to sell after its buyer discovered just weeks before settlement the home had tenants - a surprise his lawyer labelled "absurd and preposterous".

Developer Hargun Singh bought the Te Atatu home for $1.555m in August 2020 expecting it to be vacant so he could knock the house down and redevelop the land.

However, three weeks before settlement, as Singh prepared his payment, he was informed the home had tenants living in it on a fixed 12 month lease.

The tenants required $18,000 compensation to vacate by November that year.

Seller Xieyan Mao maintained she had told her Harcourts selling agent the home had a fixed tenancy and that she wanted to sell it without any open homes so the tenants were not disturbed.

However, Singh insisted the home must be handed over without tenants in it by the settlement date or else he would start charging Mao penalty payments.

Mao subsequently pulled out of the sale.

That resulted in a lengthy legal dispute.

Justice Mark Cooper ultimately sided with Singh in a Court of Appeal judgement released this month.

Singh "simply wanted to get what he bargained for" and that failed to happen when he was not told beforehand about the tenants, Cooper said.

Cooper said Mao began considering developing the site in 2019 when she obtained resource consent to subdivide the 800sq m property and build up to seven terrace houses on it.

Later in June 2020, she leased the property for a fixed 12-month term from July 8, 2020 to July 6, 2021.

She then listed the home for sale through a friend at Harcourts Te Atatu South, Cooper said.

The advertisement marketed the home as ripe for development and said it came with resource consent.

It did not mention the existing tenancy, however, Cooper said.

Later when Singh agreed to buy the property, the purchase agreement contained a box in which the names of tenants could be stated.

"The box was left empty and the words 'Yes/No' beside it were untouched," Cooper said.

It was only on August 25, 2020, a few weeks before the September 16 settlement date, that Mao's lawyer wrote to Singh's lawyer saying "there is actually a tenant" in the home.

Mao's lawyer said that due to an oversight the tenant's details were not included on the purchase agreement.

However, the lawyer said that because Mao had told her agent about the tenants "she won't be responsible for any costs claimed by the tenant due to the [break-up] of the fixed term of tenancy".

Singh's lawyer responded by calling Mao's position "absurd and preposterous".

His lawyer said Mao "had omitted / withheld significant information".

Singh had been led to believe the property would be handed over as "vacant possession" on the settlement date, the lawyer said.

"The property was marketed as a development potential," Singh's lawyer said.

"Our client has on this basis engaged its architect and engineers straight after it signed the Agreement and has spent [a] considerable amount of money on these professionals because our client wishes to commence development as soon as it settles."

The lawyer said that if the property wasn't provided as vacant possession, Mao would be held liable "for all the costs and damages" Singh suffered as a result.

When the parties later failed to complete the settlement by September 16, Mao's lawyer wrote to Singh on October 2 to say she was cancelling the sale.

Cooper in his Court of Appeal judgment this month backed up an earlier High Court decision on the case.

That found "Mao had clearly showed an unwillingness to settle in accordance with the Agreement", Cooper said.

"She was not in all material respects, ready, willing and able to settle," the judgment said.

Therefore the original sale agreement "remained in full force and effect" and Singh was entitled to seek compensation plus penalty interest payments for the failure to settle, Cooper concluded.